PETALING JAYA: Food and beverage (F&B) companies in Malaysia will likely remain pressured by margin compression for at least the next two consecutive quarters, says MIDF Research.
According to the brokerage, controlling raw material costs would be a challenge to F&B companies in the short term due to the normalisation of commodities prices on top of weakening of the ringgit.
However, on a positive note, MIDF Research acknowledged that F&B players had taken appropriate measures to mitigate the impact of rising costs.
“We expect the margin compression will continue for at least two consecutive quarters. Nevertheless, we are not overly concerned on the commodity prices uptrend on the long term, as we believe local F&B players have taken appropriate measures through product innovation and improvement of internal operating efficiency,” it said in its report yesterday.
MIDF Research has maintained its “neutral” stance on the F&B sector.
It pointed out that F&B players such as Fraser and Neave Holdings Bhd (F&N), Nestle (M) Bhd and Dutch Lady Milk Industries Bhd had benefited from the subdued commodity prices for the past two years, with their gross profit margins widening for seven consecutive quarters from the fourth quarter of 2014 to the second quarter of 2016.
However, gross profit margins of these F&B players started declining in the third quarter of 2016. This was in line with the surge in the prices of agricultural commodities such as skim milk powder, coffee beans and raw sugar from February 2016.
“We presume that the commodity prices have between three and four months of lagging impact to the companies’ cost of sales, on the back of their average inventory turnover of about two to three months. Therefore, we expect that margin compressions will continue for at least another two consecutive quarters,” MIDF Research said.
It noted that the F&B sector also faced cost pressures due to depreciating ringgit, as the commodities that formed their raw materials are traded in US dollar.
In the latest earnings announcements, MIDF said F&B players under its coverage – F&N and Nestle – had registered mixed earnings results. It noted that F&N’s latest financial results came in lower than its expectations as well as that of consensus, as the company’s earnings had been dragged down by lower revenue and high operating cost.
Nestle’s results, on the other hand, were in line with expectations.
MIDF Research had cut its target price for F&N to RM25.32, with a “neutral” call, to reflect the company’s slowdown of F&B Malaysia business segment and rising commodity prices. Its previous target price for F&N was RM28.35.
The brokerage maintained its target price for Nestle at RM82.82, as it believed the company was fairly valued at this juncture.
As for Dutch Lady, which was not under MIDF Research’s coverage, the company had recorded earnings below consensus expectation as uptrend in skim milk powder prices had impacted earnings.
The research house said it expected the upward trend in the prices of skim milk to remain, as demand would continue to be strong, while production of milk was falling in major exporting regions, particularly Europe and Australia, coupled with an unprecedented decline in New Zealand milk supply due to wetter spring season from September to December this year.
MIDF Research said coffee beans prices would also remain volatile in the short and medium term, while the recent drop in cocoa prices would help cushion the increase in other commodity prices for F&B players that use cocoa as one of their raw materials and sugar prices would likely be more stable from next year onwards.